The Cost Conscious Farm
To stay profitable in these tough times your farm business MUST focus on cost reduction. When I was working with Toyota, cost reduction was a key focus for every single person in the company. It was a consistent message delivered by senior management at every opportunity. This is an example of one such speech delivered by the CEO of Toyota Motor Europe, Dr Shuhei Toyoda, during my time with Toyota:
“Cost reduction must be a fundamental part of our working life at Toyota. We must encourage all our members to have a cost conscious mind and we must lead and stimulate the cost reduction activities both on the shop floor and in the office. As manufacturing companies, cost reduction is the single biggest weapon to improve our profitability. It is also our main defence against negative external factors.”
This is one of the most significant quotes I have picked up during my 23 years working in improvement. I keep coming back to it, time and time again and it is just as relevant now as it was in the past, and also just as relevant for farming (if not more! – we can’t simply put up our prices) as it is to every other industry.
What was unique in Toyota is that this mindset of cost reduction and eliminating waste was instilled in every single person working at Toyota – it was everybody’s responsibility whether you were the cleaner, the engineer or the CEO. Everyone was responsible for identifying cost reduction opportunities through waste elimination and having a cost conscious approach to everything.
What I have noticed on farms over the last few years is that Cost often sits with management or the share milker/ contract milker. It is not often integrated within the team and driven by the team.
To be able to focus on cost and identify opportunities for cost reduction, your team (if you have one) must understand costs; understand how much things cost, understand how they can contribute to this cost and therefore what role everyone can play in reducing unnecessary cost.
Cost reduction IS NOT about cutting corners
IMPORTANT – COST REDUCTION IS NOT SKIMPING ON THINGS OR CUTTING CORNERS!!!!!
In a lean world, when we talk about cost reduction this is not the same thing as skimping on things, cutting corners and taking cost out at all expense. We reduce cost by NOT WASTING. This is where the 8 Wastes comes in – every day we do a lot of activities or things that just add unnecessary cost to our farm business because we have not been very efficient or effective. This could be due to the ineffective way we have done a job, the incorrect decision we made or unnecessary quantity of product we have used for a job. This is waste that is created by poor processes, or processes that we don’t have in place in the first place. Therefore we do things at the wrong time, or in the wrong way or using too much of something unnecessarily or we get the wrong result which then wastes even more time, money and resources to fix it. All this adds unnecessary COST to our farm – cost in the form of labour, materials, feed, petrol, resources, animals etc. So cost reduction is about identifying anything that we do that does not add value but is simply waste, and trying to eliminate this waste. The aim should be to produce our product (milk, crops, vegetables, meat, eggs etc) in the best way possible – with the highest quality, safest method, excellent animal welfare, easiest way, most efficient way, most sustainable and ethical method, and at the lowest cost. We need to tick all the boxes holistically.
Photo: Not managing your silage properly can result in a lot of cost in wasted feed
The first thing must be for your team to actually understand cost and how they can influence this. Understanding feed costs, fertiliser costs, animal medication costs, maintenance costs, vehicle costs, fuel and diesel costs etc, – on a weekly or monthly basis helps the team to see how much all these things cost. Importantly most of these things are costs that the team have control over and can influence. If someone is using a tractor incorrectly and the front loader breaks and the cost to repair is $3000 then very quickly people can understand how costly incorrect use of something is. If the incorrect animal medication is being used or it is wasted and people become aware that this one bottle costs $100, then soon they will understand each time they pick up that bottle it is $100 and they will become more conscious on how they use it. If people know how much meal or maize or minerals cost, they can understand better why stack management is so important so that feed isn’t left to waste. Or why it is critical to ensure in shed feeding is maintained and accurate and bins are clean so that meal is not wasted.
Connect cost with action immediately
If a problem has occurred that has generated an unnecessary cost, highlight this cost immediately to the team so that they can understand the cost implications of a problem immediately while it’s fresh in everyone’s minds and it is relevant. There is no point talking about an expensive motor bike repair 8 months later at the end of the season – it is too late to prevent more of that happening during that season and people have long forgotten the incident and it won’t have the same impact. If a pump in the dairy parlour/ shed has stopped working and has cost $2000 to repair then discuss this with the team immediately as soon as the invoice is received. If the pump stopped working because of inadequate maintenance for example it was covered in dust and cobwebs, then it’s a good opportunity to reinforce why maintenance is so important. Associate that cost with something meaningful to the team eg “that is the same cost as a whole week’s salary” or “ we could have bought a new chainsaw for that and instead we’ve just thrown that money away unnecessarily”.
Prevent the cost or eliminate it
If unnecessary costs are identified, work with the team to prevent the costs from occurring again or eliminating them from the process or farm. For example if someone identifies that meal is still left in the in shed feed bins after each feed and it equates to about 10% of the meal fed each week, which costs us $1000 per week in wasted meal, then something must be done to stop this problem. This is where continuous improvement comes in – the team work together to identify the root cause of the problem and them implement improvements to stop the problem from happening again.
If tractor maintenance costs are very high because we are constantly puncturing tyres and each time it costs $600 to fix a tyre, then the team can investigate why this is happening and put in place countermeasures to stop tyres being punctured. This step by step approach to understand the cost of things and what the team can do to prevent it, starts to make a massive impact on your cost reduction activity. There are many things we do on farm that add unnecessary cost, so if we target something each week it all starts to add up to considerable cost reduction. Focus particularly on the things that the team have direct control over and can influence.
Talk about cost every day
To create a cost conscious farm, Cost must be talked about every day. Importantly the team need to have complete transparency around what key costs are, on a regular basis. We try to graph these monthly and discuss the key ones such as maintenance, feed, fertiliser, animal health, shed expenses every month during our Monthly Big Picture session. By graphing them against target and visualising them on our visual management boards, the costs are always transparent and front of mind.
Photo: We graph our costs and display the graphs visually as part of our team visual management boards
Remember cost reduction is your key weapon to staying profitable when things out of your control eg interest rates, milk prices are not favourable.